"We are teetering on a planetary tight rope”  - Antonio Guterres, UN Secretary General, October 2024

The UN Emissions Gap report published last week came with a pretty stark warning. If the world only implements its current climate policies then the planet's temperature could rise by up 3.1C. However, if countries follow through on their promises to cut their carbon emissions to net zero then the temperature rise could still be limited to 1.9C.

On the morning of 6 November, the world will find out who will be the next leader of the United States. If current betting markets are right, then it looks like Donald Trump will become the 47th President of the United States.

Why does this matter? Trump is a well-known sceptic of climate change, mostly notably pulling the US out of the Paris Climate Agreement during his first term in office and calling the Green New Deal the “Green New Scam.” And he recently said that he wants to dismantle the Inflation Reduction Act (IRA) which President Biden put in place to help provide funding for clean energy technologies, instead redirecting any unspent funds to other priorities.

Financial markets love two things: certainty and simple narratives. Whilst the outcome of the election is still far from certain, the narrative around the candidates is clear. Harris is good / Trump is bad for all things renewables. Already the prices of clean energy shares around the world have plunged as Trump's poll ratings have soared.

For sure, Donald Trump would love to repeal the IRA. It would be a big, bold slap in the face for his arch-rival, Joe Biden. Equally, Kamala Harris is hoping to build on the benefits that the bill has brought.

Political desire meets political reality

However, dig into the detail and the reality is a lot more complicated. Whilst Trump is certainly creating a lot of noise with his bluster about killing off the centrepiece of Biden's climate policy, the fact is that the IRA is bringing much needed investment into the United States. Over $40bn worth of job creating new factories are being built in 2025 alone, many of which rely on the subsidies provided by the bill.

What's more is that much of the funding is going into traditionally Republican states. BloombergNEF (BNEF) estimates that of the $113bn of investments made so far into renewables or electric vehicle value chains, almost 40% have gone to red states, and a further 47% into the electorally critical swing states.

Ironically, part of this is to do with climate. Wind turbines need wide open spaces and lots of breeze, conditions mostly found in the Great Plains states in the heart of Republican America.

Don't forget that Tesla is a big beneficiary of IRA money. Zachary Kirkhorn, Tesla's former CFO, confirmed on his Q2 2023 call with analysts that the company expected to receive between $150m to $250m each quarter in manufacturing incentives. Indeed, around the same time, industry consultants Benchmark Minerals estimated that Tesla and its battery partner Panasonic will receive $41bn in tax credits by 2032. Big numbers, even for a billionaire like Elon Musk.

No wonder a group of 18 Republican Representatives recently sent a letter to House Speaker Mike Johnson warning against moving aggressively to repeal the bill. Trump needs to balance carefully on his own political tightrope.

The long term path is set

In reality, to repeal the Inflation Reduction Act, Republican's would need to control all three arms of government - the White House, Senate and House of Representatives. This is possible but unlikely, at least according to current polls, with the Democrats forecast to regain control of the House whilst the Senate race is too close to call.

Calling the winners and losers from the US election is beyond the abilities of mere European stock pickers such as ourselves. However, the chart below shows what the team at BloombergNEF think.

Our take away is that no matter who wins the race to the White House, the path for renewable investments in the US will likely remain intact. Indeed, BNEF's worst case scenario, an immediate repeal of the tax credits, only leads to a 17% drop in capacity additions in wind, solar, and energy storage in the years up to 2035. To long term investors such as ourselves, it appears that the trajectory for renewable capex is set to remain very strong.

Helping the world decarbonise

Why does this matter to us? If you have followed our recent blogs, you will know that we have around 30% of our European portfolio invested into decarbonisation plays. Holdings such as Cadeler, Siemens Energy and Friedrich Vorwerk have been performing well as renewable spending has driven their order books to all time highs. Within Downing's wider business, our private asset team continues to pour money into renewable assets such as hydro.

We still think this is the right place to be invested. At a time when investors are worrying about weakness in the European macro-economic environment, having a substantial part of the portfolio driven by structurally robust drivers such as offshore wind or the need to upgrade electricity networks around the globe to cope with a more decentralised generation landscape is a good thing.

No matter who wins the US election, we remain hopeful that the world will continue to walk the climate tightrope successfully.

‍This article was written by Mike Clements, Manager of the VT Downing European Unconstrained Income Fund.

Risk warnings: Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in our funds should be held for the long-term and are higher risk compared to investments solely in larger, more established companies. Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice.

Important notice: This content is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing LLP as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street, London EC3R 6EN.